New Zealand's house price boom is over

February 20, 2018

This is a sea-change in New Zealand´s housing markets. New Zealand´s prices haven´t risen at all in real terms over the past year, after inflation is factored in. Instead, they declined by 0.73% during the year to September 2017 (though in nominal terms the nationwide median house price rose by 1.2%, to NZ$ 525,000 (US$ 362,932).

During the latest quarter, house prices fell by 0.76% (-1.24% inflation-adjusted).

What a change! Last year, house prices were rising at breakneck speed, surging 13.91% (+12.41% inflation-adjusted). In 2015 and house prices rose by 11.15% (+11.06% inflation-adjusted), according to the Real Estate Institute of New Zealand (REINZ).

Why the reversal? Mortgage interest rates are inching up. A ban on buying by non-resident foreigners is imminent. Days-on-market are rising. And, frankly, house prices have become very high - especially in Auckland.

(But are prices "too high" in Auckland? Maybe not - read on below).

Auckland has average prices of NZ$ 845,000 (US$ 604,513) - the country´s most expensive - followed by Bay of Plenty, with an average price of NZ$ 547,500 (US$ 391,682), and Wellington, with an average price of NZ$ 531,000 (US$ 379,878).

Auckland saw no price movement from the previous year, while house prices declined in the West Coast (-15.6%) and Canterbury (-3.2%).

The highest price increase was recorded in Hawke´s Bay, with prices surging by 18.3% during the year to Q3 2017. Double digit house price hikes were also observed in Gisborne (14.9%), Northland (14.4%), Wellington (10.6%), and Southland (10%).

The cheapest housing can be found in West Coast, with an average price of NZ$ 208,500 (US$ 149,161), followed by Southland (NZ$ 220,000 or US$ 157,388), Gisborne (NZ$ 270,000 or US$ 193,158), and Manawatu/Wanganui (NZ$ 271,000 or US$ 193,873).

MEDIAN PRICES BY REGION, Q3 2017

Regions

Median price

m-o-m change

y-o-y change

NZ$

US$

%

%

Hawke´s Bay

392,000

280,437

-3.2

18.3

Gisborne

270,000

193,158

14.9

14.9

Northland

446,000

319,069

3.7

14.4

Wellington

531,000

379,878

5.1

10.6

Southland

220,000

157,388

-12

10

Manawatu/Wanganui

271,000

193,873

-4.9

8.4

Bay of Plenty

547,500

391,682

2.3

7.9

Otago

397,500

284,372

3.2

6

Nelson/Marlborough/Tasman

472,000

337,669

-0.6

4.9

Waikato

480,000

343,392

0

4.7

Taranaki

360,000

257,544

9.4

4

Auckland

845,000

604,513

1.2

0

Canterbury

426,000

304,761

-0.1

-3.2

West Coast

208,500

149,161

9.7

-15.6

NEW ZEALAND

525,000

375,585

-0.9

1.2

Source: Real Estate Institute of New Zealand (REINZ)

"House price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing," according to Reserve Bank of New Zealand (RBNZ) Governor Grant Spencer.

New Zealand saw spectacular house price rises of about 114% (82.6% inflation-adjusted) from 2001 to 2007. Then after a pause, there were five further years of substantial price rises 2012-2016. Because of this, housing in New Zealand has become really expensive, for a country with such a small population relative to its landmass.

Properties on market for sale up, but sales down

Property sales in New Zealand declined by 8.9% to 6,893 units during the year to November 2017, according to the REINZ. At the same time the number of properties for sale rose by 7.6% y-o-y.

In Auckland, the level of inventory increased to 23 weeks supply in November 2017, up from 14 weeks during the same month last year, according to the REINZ. However when Auckland is excluded, the the increase in the number of properties for sale was only up by 0.5%.

Wellington has the fewest properties for sale across NZ with nine weeks of supply in November 2017. It was followed by Hawke´s Bay with 11 weeks supply, Otago with 14 weeks supply, Nelson/Marlborough/Tasman with 15 weeks supply, and Taranaki with 16 weeks supply.

Nationwide, the number of days-on-market rose by one day to 33 days in November 2017 from a year ago, according to the REINZ.

In November 2017:

In Auckland, sales declined by 16.48% from the previous year

In Wellington, sales rose by 6.22% y-o-y

In Canterbury, sales were up by 8.02% y-o-y

In Waikato, sales fell by 15.33% y-o-y

In Bay of Plenty, sales were also down by 24.34% y-o-y

Sales of residential properties valued over US$1 million have fallen by 7.26% in November 2017 from a year ago.

New Zealand´s high house prices are a political hot potato

During the previous housing boom from 2001 to 2007, house prices in New Zealand surged by almost 114% (82.5% inflation-adjusted), including 24.8% in 2003, 12.2% in 2004, 15.3% in 2005, 9.7% in 2006, and 8% in 2007. Big rises - but then, this was a period when the economy expanded by an average of 3.6% every year.

House prices started to fall in early 2008, but the decline was much less than in other countries:

In 2008, house prices fell 8.94% (-11.91% inflation-adjusted).

In 2009, house prices rose by 5.28% (+3.26% inflation-adjusted).

In 2010, house prices fell by 1.69% (-5.49% inflation-adjusted).

In 2011, house prices rose by 2.89% (+1.03% inflation-adjusted).

In 2012, house prices rose by 6.75% (+5.75% inflation-adjusted).

In 2013, house prices rose by 9.16% (+7.41% inflation-adjusted).

In 2014, house prices rose again by 6.36% (+5.56% inflation-adjusted)

In 2015, house prices rose strongly by 11.15% (+11.06% inflation-adjusted)

In 2016, house prices rose sharply by 13.91% (+12.41% inflation-adjusted)

Ban on foreign home buyers

One reason for strong house price rises has been the healthy expansion of New Zealand´s economy.

A second reason was low interest rates.

A third reason was high immigration.

New Zealand´s net immigration reached a new peak of 70,588 in 2016, an increase from 64,930 in 2015, 50,922 in 2014, and 22,468 in 2013. From 2005 to 2012, the country´s net immigration averaged only 7,446 people every year, because of the weak economy and low employment opportunities. In contrast, net permanent and long-term immigration was more than 38,000 people 2002, 35,000 in 2003 and 15,000 in 2004.

International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom of the early-2000s was strongly associated with strong immigration.

In recent years buying tours, mainly by Chinese speculative buyers, have increased concern.

The results of these different pressures are clear. Around 40,000 people in New Zealand, or 1% of the population, are living on the streets or in emergency accommodation, according to a Yale University study published in July. This is the highest rate of homelessness in any developed country.

The issue dominated October´s elections, which saw Labour prime minister Jacinda Ardern ending nine years of government by the conservative National Party. The new government took over the previous government´s plans to introduce legislation to ban foreigners from buying homes in New Zealand early this year.

The country will only allow those who hold a residential visa to buy existing homes. Overseas developers and individuals will have to build new homes if they want to purchase residential property.

"It will mean, for practical purposes, that foreign buyers will not be able to buy residential property unless they are either increasing the number of residences and then selling them or converting the land to another use. They will need to be able to show that this will have wider benefits to the country," said Land Information Minister Eugenie Sage.

Are property prices too high? Maybe not - yields are good.

New Zealand´s house prices have been estimated by Deutsche Bank to be 30% overvalued relative to income, and 82% overpriced relative to rents, with Auckland the worst outlier.

The Demographia survey uses the Median Multiple to assess housing affordability in 406 metropolitan housing markets in Australia, Canada, China (Hong Kong), Ireland, Japan, Singapore, New Zealand, the United Kingdom, and the United States. The Median Multiple follows this formula: Median Multiple = median house prices / median household income. A median multiple of 3.0 and below is considered affordable.

However these assessments of overvaluation and severe unaffordability are contradicted by the Global Property Guide´s own research, which suggests that rental yields in New Zealand´s prime cities are reassuringly high by international standards, and that on this measure, New Zealand´s high residential property prices are amply justified (see below).

Rental yields are very good in Auckland and Wellington, poor in Christchurch

For a developed economy, yields in New Zealand are attractive.

In Auckland, rental yields on apartments range from 6.09% to 7.18%, according to Global Property Guide research conducted last August 2016. The key to getting good yields is smaller apartments, which earn much more than large apartments.

And rental returns on apartments in Wellington have now moved ahead of Auckland. Rental yields ranged from 6.88% to 8.43% in August 2016, with smaller apartments earning more.

In Christchurch, rental returns on houses, which are usually lower than on apartments, range from 2.96% to 4.26% over the same period.

Though average private rents have been generally rising modestly across the country, regional figures show mixed results. In Auckland, the average rent for new private tenancies rose by 3.46% y-o-y to NZ$ 509 (US$ 347.55) in September 2017. In Greater Wellington region, rents also rose by 8.07% y-o-y to an average of NZ$ 415 (US$ 283.36) during the same period. In contrast, rents in Greater Christchurch fell by 1.9% y-o-y to NZ$ 362 (US$ 247.17).

Across the various areas within Auckland, in September 2017:

In Central East Auckland, the average rent rose by 4.03% y-o-y to NZ$ 439 (US$ 299.75)

In Central West Auckland, the average rent rose by 3.19% y-o-y to NZ$ 453 (US$ 309.31)

In Manukau, the average rent went up by 2.62% y-o-y to NZ$ 431 (US$ 294.29)

In the North Shore, the average rent increased by 3.6% to NZ$ 547 (US$ 373.49)

Although banks are still allowed to lend mortgage loans with smaller deposits, they can only do so up to a certain limit.

These measure have led to higher residential mortgage interest rates (October 2017):

Floating mortgage rate -5.89%, up from 5.64% a year earlier

IRF: 6 months - 5.22%,up from 5.12% a year earlier

IRF: 1 year - 5.05%, up from 4.93% a year earlier

IRF: 2 years - 5.25%, up from 5.06% a year earlier

IRF: 3 years - 5.57%, up from 5.23% a year earlier

IRF: 4 years - 5.84%, up from 5.23% a year earlier

IRF: 5 years - 6.25%, up from 5.61% a year earlier

In November 2017, RBNZ Governor Grant Spencer noted that these measures had dampened the rapid house price hikes.

"Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017," according to the RBNZ governor.

From 10% of each bank´s total lending to owner-occupiers, the limit for borrowers with a deposit of less than 20% was raised to 15%.

No more than 5% of each bank´s new mortgage lending to residential property investors can be at LVRs of more than 65% (up from an earlier LVR of 60%).

Key rate remains at 1.75%

During its most recent meeting in November 2017, the decided to keep the OCR unchanged from the historic low of 1.75% at which is has been since November 2016. That´s because while unemployment has fallen, inflation remains moderate in Q3 2017. However, the economy is strong, and inflation is inching up.

New Zealand´s mortgage market has ballooned to 88.5% of GDP in 2016, up from just 51.4% of GDP in 1998. In October 2017, the total value of outstanding housing loans rose by 6.22% y-o-y to NZD 241 billion (US$ 164.92 billion), slower than the 9% y-o-y growth rate recorded in October 2016.

More authorized new dwellings

In 2016, more than 30,000 new dwelling consents were authorized, up 10.8% from the previous year, and a significant increase from 24,700 units in 2014, 21,300 units in 2013, and 16,900 units in 2012.

Auckland accounted for the highest share of the total new dwellings authorized, at around 34%, during the first ten months of 2017, followed by Canterbury (17%), and Waikato (12%) regions.

Robust economic growth will continue in 2018

New Zealand´s economy is projected to expand by over 3% in 2018, according to the International Monetary Fund (IMF). For the last three years, the economy´s performance has been the strongest since 2007, with growth of 3.5% in 2017, 3.6% in 2016, and 3.2% in 2015, according to the IMF.

After the Asian financial crisis New Zealand experienced years of unbroken economic growth. The economy grew by an average of 3.8% per year from 1999 to 2007.

During the recent global crisis the economy contracted only briefly and mildly - by 0.4% in 2008. The economy grew slightly by 0.4% in 2009. New Zealand emerged swiftly from recession, after only five quarters of negative GDP.

New Zealand´s net external debt remains low at around 22.2% of GDP (2016-2017), a decline from 24.4% of GDP in the previous fiscal year.

Unemployment stood at 4.6% in Q3 2017, according to the Statistics New Zealand. Inflation was up by 1.9% during the year to Q3 2017, an increase from 0.4% in Q3 2016. The current inflation is within the RBNZ´s target range of 1% to 3% for 2017.

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